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Colonial Pipeline Completes Damage Assessments

Monday, Aug 31 2020
Market Talk

It’s a mixed bag for energy prices to start the last trading day for August, which seems a fitting end for a month that had plenty of back and forth action.  Oil prices are on the cusp of six month highs following reports that Abu Dhabi is cutting its deliveries by nearly 30 percent in order to comply with the OPEC & friends output agreement. Refined products, meanwhile, are struggling to break even on the day as the damage assessments from Laura continue to show relatively minor impact to supply infrastructure from such a major storm. 

Perhaps the most important news over the weekend was a report that Colonial pipeline had completed its damage assessments and was operating across the system, even in the areas like Lake Charles that took a direct hit from the storm, meaning the SE and East Coast markets should not see any supply disruptions.

The Phillips 66 and Citgo refineries located near Lake Charles are expected to take several weeks to come back online, with reports suggesting both sustained damage from the storm, although details remain scarce. In an ordinary year losing nearly 700mb/day of refining capacity would be enough to push Gulf Coast cash prices and futures higher, but with so much excess capacity available due to COVID demand destruction, the price impact has been minimal, and in some cases we could see downward pressure as exports are delayed.

Power outages seemed to be the biggest hindrance to restarting pipeline and refinery operations around the Beaumont/Port Arthur hub, but most of those issues seem to have already been sorted out, with most facilities reported restarts underway.     

We’re near the seasonal peak for hurricane activity in the Atlantic basin, and there are four more potential storms being tracked this week. The system off the coast of Florida is given a 70 percent chance of developing further, but is expected to move away from the coast and stay out to sea. The other three will need to be watched, as they could eventually point towards the U.S.

Baker Hughes reported three more oil rigs were taken offline last week, two of which came from the Permian basin, dampening recovery expectations after last week’s increase. A Reuters story this morning details why deals done during the second shale boom may now hinder the recovery in domestic drilling.

Money managers were buying up RBOB contracts ahead of the storm, pushing the net length held by the large-speculative trader category near a six month high. With Laura sparing most of refining country, the fall RVP transition in process and the driving season behind us, it’s likely we’ll see a liquidation of those positions before long. Crude and diesel contracts saw minimal changes on the week, and open interest in energy contracts remains subdued. 

Click here to download a PDF of today's TACenergy Market Talk.

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